Financial crisis? How worried should I be?
When the US president goes out of his way to assure citizens that their money is safe, you know the government is concerned about a financial crisis.
Joe Biden’s assurances came following the failure of two US banks.
But this isn’t just about the United States. Several bank shares have dropped in value around the world.
So, how serious is this financial crisis, and what does it imply for you?
What is going on with banks, and are they in danger of collapsing?
Since March 10, two banks in the United States have failed: Silicon Valley Bank (SVB) and Signature Bank, the largest financial crisis induced bank failures since 2008.
Both catered to corporations and had ties to the IT industry but struggled as cryptocurrencies plummeted and investor sentiment soured.
Customers panicked and raced to withdraw their deposits when the country’s 16th largest bank, SVB, announced it needed to raise funds. Over a fourth of the bank’s funds had vanished in less than 48 hours.
Following the spread of panic to Signature, regulators announced that they would guarantee all deposits at both banks, not just the $250,000 as required by law.
The failures came just days after a third bank, crypto-specialist Silvergate, was forced to close.
Will other banks fail as well?
A bank run occurs when a huge number of clients hurry to take their money simultaneously, raising concerns that other institutions may be vulnerable.
Shares of medium-sized banks in the United States have plummeted as investors fear their small businesses and wealthy customers would transfer substantial quantities of money to other banks.
Larger banks are considered more stable because they serve a broader range of customers, including regular individuals who are less sensitive to market news and typically have deposits under the $250,000 limit.
Although concerns at a few banks, such as San Francisco-based First Republic, S&P Global Ratings say they have yet to see evidence in the US that massive “unmanageable” withdrawals have spread widely.
But, as a sign of the difficulties, the US central bank announced an increase in emergency lending to banks needing capital. In Europe, Credit Suisse, which has been in difficulties for years, received a £45 billion lifeline from the Swiss central bank.
Why are banks failing now?
The current financial crisis is taking place against the backdrop of a far larger global change: the recent dramatic spike in borrowing costs.
Central banks worldwide, including the US Federal Reserve and the Bank of England, have been hiking interest rates to slow the economy and relieve the pressure that has been pushing up prices.
The hikes exacerbated SVB’s problems by making it more difficult for its start-up customers to borrow money, forcing them to withdraw it faster.
Nevertheless, the rise in rates – a significant reversal after years of low-cost borrowing – had created a much broader issue, undermining the value of long-term bond investments purchased by banks when interest rates were lower.
Banks in the United States alone are sitting on over $620 billion in unrealized losses.
That is fine if they can keep the bonds. Yet, it makes it much more difficult if they need to generate funds quickly.
Morningstar analysts described Credit Suisse’s financial crisis as “idiosyncratic,” adding that European banks generally were “strong.”
As expected, the ECB raised interest rates by 0.5 points on Thursday, but economists anticipate that the US and UK central banks will be more cautious when meeting next week.
Is my money secure?
Regular folks have little reason to be concerned about their finances despite the ongoing financial crisis.
The American government has historically protected deposits up to $250,000; the ceiling in the UK is £85,000.
US Vice President Joe Biden has committed to do “whatever it takes” to safeguard the security of the financial system and reassure customers that their money is safe, while leaders in Europe, Japan, Australia, and other countries have also sought to assuage public worry.
But, as a sign of the difficulties, the US central bank reported an increase in emergency lending to banks needing capital. In Europe, Credit Suisse, which has been in difficulties for years, received a £45 billion lifeline from the Swiss central bank.
Read Also: Credit Suisse investors fears fears heighten
Japan, a major buyer of US government bonds, addressed the concern months ago. Analysts in Europe say it’s not a big deal.
The ECB raised interest rates by 0.5 percentage points on Thursday, as expected, but economists anticipate the US and UK central banks to be more cautious when they meet next week.